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Fastly Hunts for Growth after Rocky Year
Stock Analysis & Ideas

Fastly Hunts for Growth after Rocky Year

Shares of Fastly Inc (FSLY) are recovering well after a rocky year, rising more than 12% in the past three months while the overall market went up almost 6% over the same period.

It is likely that longer-term factors are driving the share price up, and I think shareholders might potentially see some more upside. However, the outlook still hangs a bit uncertain for this company. Thus, I am neutral on Fastly. (See Analysts’ Top Stocks on TipRanks)

Based in San Francisco, California, Fastly Inc is an infrastructure as a service operator of an edge cloud platform. It provides various processing and securing solutions for the applications of U.S. and international customers. These include communication companies, financial technology operators, and various retailers.

Q3 Earnings

For the third quarter of 2021, Fastly reported an adjusted net loss per share of 11 cents, on $86.7 million of revenue, versus an adjusted net loss of 4 cents a share, on $70.6 million of revenue for the corresponding period of 2020. Analysts were beaten on revenues by $3.3 million. 

The turnover improved thanks to more accounts from customers with a spending propensity of over $100,000 in twelve months. Fundamentally, this followed the acquisition of Signal Sciences in 2020, a specialist in first web application and API protection solutions. 

Adopting a modern edge platform with up-to-date products helped preserve the portfolio of customers. In fact, the Net Retention Rate (NRR) of 112% was a 19 point improvement quarter-over-quarter.

On a year-over-year basis, the adjusted gross margin dropped 230 basis points to 57.5%. This shouldn’t concern investors because the margin downturn is attributable to usage patterns returning to pre-pandemic levels.

Hunting For Growth

Besides being a strategic acquisition, the incorporation of Signal Sciences is a smart move. Today’s issue with global networks is the considerable risk of cyber threats for individuals and businesses.

Therefore, Fastly’s spending on security is an investment in future growth. It is a solid catalyst for acquiring new customers who demand a safe environment for their applications. In such an ecosystem, each of Fastly’s future investments in network capacity expansion will have a higher likelihood of being an efficient one.

Looking Ahead

Looking ahead to Fiscal Year 2021, the company projects total revenues of $347 million to $350 million versus analysts’ average projection of $349.15 million. The adjusted net loss is expected to be in the $0.58 to $0.55 range, while analysts have estimated a net loss of $0.54 on average.

Wall Street’s Take

In the past three months, three Wall Street analysts have issued a 12-month price target for FSLY. The average Fastly price target is $52.50, implying 13.7% upside potential. The company has a Hold consensus rating, based on three Holds assigned.

Summary

The acquisition of a specialist in network safety solutions created a favorable terrain for the company’s expansion projects. Nonetheless, this market is highly competitive, which implies a significant failure rate for inorganic growth strategies. Thus, before buying shares, I would wait for more positive trends in network usage following the acquisition.

Disclosure: At the time of publication, Alberto Abaterusso did not have a position in any of the securities mentioned in this article.

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